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This Restaurant Stock Is on a Stronger Earnings Path

By Demitri Kalogeropoulos – Sep 14, 2021 at 9:19AM

Key Points

  • Sales are back to setting records.
  • But spiking profitability is the bigger story in this rebound.
  • Investors won't know if the earnings spike is just a temporary boost until a few quarters have passed.

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The restaurant chain is growing sales again, but not as quickly as some peers.

Dave & Buster's Entertainment (PLAY 2.72%) is finally back to setting sales records. The restaurant and entertainment specialist last week announced a return to record revenue levels more than a year after the pandemic devastated its business.

The company isn't growing as quickly as peer restaurant chains, and that fact might pressure the stock given its huge run-up so far in 2021. Yet there are other reasons to like Dave & Buster's today, including its increasing profitability.

Let's take a closer look.

A person playing an arcade game.

Image source: Getty Images.

Sales trends

As expected, the company crossed back into positive sales territory in the three months that ended on Aug. 1. Revenue eclipsed 2019 levels, rising to $378 million compared to $345 million. Sales in last year's second quarter were just $51 million as most of its restaurants were temporarily closed.

Comparable-store sales were up 4% versus 2019, which kept Dave & Buster's well behind industry leaders like Starbucks and McDonald's. Starbucks is growing at a 10% rate compared to 2019, the company said in late July. McDonald's sales are up 15%.

Still, shareholders should be happy to see the chain growing again. "Dave & Buster's second quarter was clear evidence that the brand is back," CEO Brian Jenkins said in a press release. "We are excited to move forward with a strong foundation to drive sustained profitable growth."

Margin bounce

The best part of the rebound story so far has been the chain's financial wins. Management decided to aggressively cut costs during the pandemic, and many of those efficiency gains are sticking around even as customer traffic bounces back. As a result, investors are seeing much better financial metrics than before COVID-19.

PLAY Operating Margin (TTM) Chart

PLAY Operating Margin (TTM) data by YCharts

Operating margin touched 21% of sales this quarter, for example, or nearly double the annual rate Dave & Buster's achieved in 2019. The chain also generated $121 million of operating cash, which helped it pay down some of the new debt it took on to survive the crisis period in 2020.

Looking ahead

Jenkins and his team project that the modest growth momentum will carry through into the third quarter, with sales likely to rise by about 1% compared to 2019. Adjusted earnings should continue soaring compared to two years ago, as well, although the spike won't be as pronounced as investors saw this past quarter. The chain is also launching several new stores and investing in existing locations through remodels and upgrades.

Those moves should all support higher growth, even as the paying down of debt lessens the pressure on earnings from interest payments. While that's good news for the business, the big question is whether Dave & Buster's can maintain anything approaching the over 20% profitability it just achieved, or if operating margin will quickly fall back to more normal levels.

There's no evidence of a quick pullback in the latest results, though, and that explains why the growth stock jumped immediately following the earnings announcement. But shareholders will have to wait for a few quarters before having a clearer picture of Dave & Buster's actual earnings power following the pandemic.

Demitri Kalogeropoulos owns shares of McDonalds and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dave & Busters Entertainment and recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dave & Busters Entertainment Stock Quote
Dave & Busters Entertainment
$38.86 (2.72%) $1.03
McDonald's Stock Quote
$275.00 (0.63%) $1.73
Starbucks Stock Quote
$99.56 (0.04%) $0.04

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